Question 1 Crede Inc. has two divisions. Division A makes and sells student desk

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Question 1

Crede Inc. has two divisions. Division A makes and sells student desks. Division B manufactures and sells reading lamps.

Each desk has a reading lamp as one of its components. Division A can purchase reading lamps at a cost of $ 9.83 from an outside vendor. Division A needs 11,300 lamps for the coming year.

Division B has the capacity to manufacture 49,900 lamps annually. Sales to outside customers are estimated at 38,600 lamps for the next year. Reading lamps are sold at $ 12.35 each. Variable costs are $ 7.50 per lamp and include $ 1.36 of variable sales costs that are not incurred if lamps are sold internally to Division A. The total amount of fixed costs for Division B is $ 75,700 .

Consider the following independent situations.

(a)

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Question 1

Crede Inc. has two divisions. Division A makes and sells student desks. Division B manufactures and sells reading lamps.

Each desk has a reading lamp as one of its components. Division A can purchase reading lamps at a cost of $ 9.83 from an outside vendor. Division A needs 11,300 lamps for the coming year.

Division B has the capacity to manufacture 49,900 lamps annually. Sales to outside customers are estimated at 38,600 lamps for the next year. Reading lamps are sold at $ 12.35 each. Variable costs are $ 7.50 per lamp and include $ 1.36 of variable sales costs that are not incurred if lamps are sold internally to Division A. The total amount of fixed costs for Division B is $ 75,700 .

Consider the following independent situations.

(a)

What should be the minimum transfer price accepted by Division B for the 11,300 lamps and the maximum transfer price paid by Division A? (Round answers to 2 decimal places, e.g. 10.50.)
Minimum transfer price accepted by Division B $

per unit Maximum transfer price paid by Division A $

per unit Click if you would like to Show Work for this question:

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Explanation / Answer

Note for undertansing : Generally Transfer price in between division is :

Lost contribution margin is not consider where there is adequate capacity for both regular sales & sales to division.

Fixed Cost are not to be consider to determine transfer price.

Answer a

Minimum transfer price accepted by Division B = Variable cost - Variable sales cost

= $7.50 - $1.36 = $6.14 per unit

Since Division B has the capacity to manufacture 49,900 lamps annually , Estimated sales to outside customers = 38,600 lamps & to division A = 11,300 lamps. thus there is adequate capacity to accomodate both , therefore no Contribution lost to be consider.

Maximum transfer price paid by Division A = Selling price to outside customer = $12.35 per unit

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